Same-Sex Couples (Still) Not “Married” for Federal Tax Purposes

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The Internal Revenue Service (“IRS”) has recently issued guidance, through answers to frequently asked questions (“FAQs”), clarifying how same-sex couples who are in state-recognized domestic partnerships, civil unions, or marriages should file their federal income tax returns. These FAQs address a key provision of the Defense of Marriage Act (“DOMA”), which denies recognition of same-sex marriages or unions for purposes of administering federal law.

Even though the Obama administration has decided not to defend this key DOMA provision, and even though a number of federal courts (including two appellate courts) have held the provision to be unconstitutional, the IRS continues to maintain that same-sex couples do not qualify for the same tax benefits that are available to taxpayers who are married to someone of the opposite sex. This is true even if a same-sex couple is legally married under state law. This IRS position could have implications in a number of benefit-plan contexts.

Background

Section 3 of DOMA defines “marriage,” for purposes of administering federal laws, as a “legal union between one man and one woman as husband and wife.” It also defines “spouse” as “a person of the opposite sex who is a husband or wife.” Consequently, DOMA prohibits the federal government from recognizing same-sex marriages (or domestic partnerships or civil unions). This prohibition affects federal income taxes, Social Security benefits, and more than 1,000 other federal laws – including ERISA and the tax laws governing employee benefits.

A number of federal trial courts (now joined by two federal appellate courts) have ruled in favor of plaintiffs challenging this provision of DOMA in various tax-related contexts. In Massachusetts v. Health and Human Services,the First U.S. Court of Appeals upheld a lower court’s ruling that Section 3 of DOMA violates the U.S. Constitution. More recently, in Windsor v. U.S., the Second U.S. Court of Appeals upheld a trial court’s ruling that DOMA violates the Equal Protection Clause of the U.S. Constitution. In Windsor, the appellate court concluded that laws affecting homosexuals as a class are subject to heightened scrutiny, and when viewed in light of such scrutiny, the disparate treatment of same-sex spouses is not “substantially related” to an important government interest.

On February 23, 2011, Attorney General Eric Holder published a statement indicating that both he and President Obama had concluded that Section 3 of DOMA is unconstitutional. The Attorney General’s statement provided that the Department of Justice would no longer defend the constitutionality of DOMA’s Section 3 as applied to same-sex married couples in cases filed within the Second Circuit. However, the statement also noted that DOMA remains in effect until Congress repeals it or there is a final (i.e., Supreme Court) judicial decision striking it down. The statement concluded by noting that, although the Justice Department would not defend DOMA in court, the Executive Branch would continue to enforce the law.

The Obama administration has formally asked the Supreme Court to step in (as the final arbiter of the constitutionality of the law), and many legal experts expect the Supreme Court to rule on DOMA’s constitutionality in the near future – possibly as early as the spring of 2013.

IRS Guidance

In its recent FAQs, the IRS continues to defer to DOMA on questions concerning same-sex couples’ federal income tax returns. In summary, the guidance provides that:

Same-sex couples who are legally married for state-law purposes may not file a return using either the “married filing jointly” or “married filing separately” status;

An individual may not file as a “head of household” based solely on his or her same-sex partner, regardless of whether the same-sex partner is the taxpayer’s dependent;

If a child is a “qualifying child” (under Code Section 152(c)) of both parents who are same-sex partners, then either parent – but not both – may claim a dependency deduction for the child;

If a same-sex couple adopts a child together, each partner may claim the adoption credit in an amount equal to the qualified adoption expenses paid or incurred by that partner, but the partners may not both claim a credit for the same expenses; and

If an individual adopts the child of his or her same-sex partner, the individual may claim an adoption credit for the qualifying adoption expenses.

These FAQs confirm that, notwithstanding the President’s decision not to defend DOMA in court, and notwithstanding the fact that DOMA has now been held unconstitutional by two appellate courts, the IRS will continue to apply and enforce federal tax laws in accordance with DOMA’s Section 3.

Therefore, until there is action by either Congress or the Supreme Court, employers must (by way of example) continue to report the value of health insurance provided to an employee’s non-dependent, same-sex spouse or partner as additional taxable income to the employee, and they must continue to limit “spousal” rights under ERISA-covered plans to participants who are married to someone of the opposite sex.